Friday, August 23, 2013

Economic Multipliers and You

By Evan D. Robertson,
Project Associate.

If you’ve paid attention to
local development news – in any capacity in any community for any length of
time – odds are you’ve encountered an impact analysis. Generally, these
economic impact analyses extoll the benefits – denoted as jobs – of a
particular (usually large) development project. These analyses are often presented
in support of building publicly financed sports stadiums, and the impact is
almost always an unwieldy, positive number. But just as these analyses can make
an argument for why a certain city should raise funds to build a particular
development project, so too can they make a case for focusing economic
development energy in a targeted sector. Combined with a thorough target
analysis – one that considers employment growth, local competitive advantages,
workforce capacity, and research and development capability along with a host
of public input, impact analyses further the case for selecting a target sector
and provide insights into the policy interventions needed for growth. At the
core of the impact assessment is the economic multiplier.

In essence, a multiplier
captures the total impact of adding one job in a given economic sector
throughout the economy. For instance, a worker in the Irradiation Apparatus
Manufacturing sector (NAICS 334517) will not only spend his or her earnings in
the local economy – thereby supporting grocers, department stores, and other
personal service workers – but also support increased economic activity within
the apparatus manufacturing sector and its suppliers. The resulting impact of
this worker spreads throughout the economy. The multiplier captures these
inter-relationships in three parts: direct (intra-industry employment gains),
indirect (inter-industry employment gains), and induced (the “ripple” effect
created when the employee spends his or her money in the local economy.
Dividing into these three component parts assists in determining where job
growth is likely to occur. A high induced multiplier would create more service
jobs, while a high indirect multiplier indicates that a sector is resource
intensive and growth will create a need for more production inputs.

As an example, I give you Milwaukee’s
brewery sector. The table below divides the total multiplier into its component
parts and denotes the total impact of one job added within the local brewery
sector. In total, one job added to Milwaukee’s brewery sector will add 3.64
employees – 4.64 if you count the initial job. Induced jobs (personal services)
stand to gain the most from this added employment while direct and indirect
jobs account for a far smaller portion. Targeting this sector may make sense if
the goal is to increase service employment – making bartenders throughout the
region extremely happy, free drinks abound. If the goal is to improve business
for local supplier firms, expanding employment in the region’s brewery sector makes
less sense. Combined with local knowledge and a full analysis of employment and
occupational data, you could begin to make a case for targeting breweries in
the Milwaukee area as well as prioritizing economic development policy
decisions to support the sector.

Milwaukee’s
Brewery Multiplier Effect

Source: EMSI

To summarize: creating jobs
leads to more jobs. And with this knowledge, it might seem like a well-founded idea
to just focus on those sectors with the highest multipliers – economic
development made simple. Right?

Well, not at all, actually.
In Milwaukee’s case, targeting the ten sectors with the highest employment
multipliers will yield this

Milwaukee’s
Top 10 Multiplier Sectors

Source: EMSI

The results are less than
appealing, the fallacy of maximizing the multiplier. As you’ll note, the
majority of the sectors either pay high wages (lessor of nonfinancial
intangible assets and securities and commodities exchanges) or require
significant raw material inputs (gold ore mining, fossil fuel electric power
generation, and petroleum lubricating oil and grease manufacturing). Their high
multipliers are more indicative of the nature of their business rather than any
sort of local competitive advantage. As you can see in the graphic above,
employment across these sectors are in long-term decline. Multipliers work both
ways: removing one job from a sector ripples throughout the economy causing job
losses at suppliers and service businesses alike. The larger the multiplier,
the larger the decline. These aren’t always the sectors you’re looking for.

Multipliers strengthen the
case for targets. In some cases, they assist in prioritizing investments to
ensure that those sectors with the biggest impact get an economic development organization’s
increasingly limited funds. Multipliers, however, shouldn’t factor into the
initial selection. For that, an extensive examination of employment, workforce
capacity, education institutions, and, most importantly, stakeholder input is
required to get the right mix of sectors that the local economy is particularly
competitive. Once you have that mix, multipliers serve to enhance the case.